Procurement of 3PL Services

IN a previous article, we wrote on how companies are changing and how these changes impact on the logistics industry. For one, we observed the growing trend towards one-stop shop logistics portfolio as seen in the rise of door-to-door deliveries even for full container load (FCL) shipments and in the growing use of the DDP and DDU (INCOTERM 2000) terms of trade.

In addition to door-to-door type of logistics service and integrated inbound logistics (to include warehousing, inventory management and distribution), companies are likewise demanding value-added services designed for specific requirements of the individual company. Multinational companies are now outsourcing most, if not all, of the supply chain requirements to third-party logistics (3PL).

Given this trend, we have provided below a discussion on some of the factors and issues involved when companies procure or negotiate for logistics services.

Logistics Costs of Companies. It is estimated that logistics cost accounts for 20%-30% of the total purchase cost of an item. In an average manufacturing firm, the amount of purchased materials (including logistics costs) accounts for around 60% of the total turnover of the company. Thus, if a company is for example able to reduce the logistics cost by 20%, it will have a savings impact equivalent to approximately 2.4% to 3.6% of the total turnover. If the overall profit of the company is 10% of the total turnover, the resulting savings from logistics costs can increase the company’s profit by 24% to 36%.

When choosing service providers, companies have varying options on the nature of relationship they want to maintain with such providers. For logistics services, it is typical for companies to maintain a collaborative or a partner type of relationship rather than an arms-length type of relationship. The common reason for this is that logistics is a high-risk and high-impact service and, as such, delays or service failures on the part of the provider may result in production stoppage or supply shortages.

Negotiating for 3PL Services. Companies normally go through three phases of negotiation when choosing a service provider. There is the preparation phase, the meeting phase and the follow-up phase. The preparation phase is probably the most important phase for the company because it is during this time that RFQs or RFPs are prepared. The meeting phase will normally involve clarifications on the quotations or proposals submitted and in some instances, bargaining on some aspects of said quotations or proposals. The follow-up stage would normally include ensuring that the agreements are implemented and that suppliers’ performance are regularly evaluated.

Part of the preparation stage also includes securing market information on the prices and costs of the services as well as understanding the prospective organization. When securing information about a supplier’s service, the following factors will have to be considered:

historical costs

quotations from other suppliers

reference prices

pricing and costing trend

expert estimate

When assessing a prospective logistics provider, a company will normally review the supplier’s capabilities and strategy by looking at the following:

technical capabilities

financial situation

value added services

management capabilities

business processes

compliance and risk standards

industrial relations

reputation, track record and network

Negotiation Objectives and Strategy. As part of the company’s strategy, the procurement of 3PL services will have to be aligned with the overall corporate objectives and the specific purchasing objectives. The specific purchasing objectives may refer to lower acquisition costs of services, extended credit line, decreasing lead time, improving clearance and delivery time, and the provision for value-added services.

While cost remains the main driver for choosing a service provider, the increasing scope and complexity of supply chain services will force companies to take a closer look and provide importance on factors such as technical and financial capabilities, technology support (e.g. information and communication technology solutions), management expertise and, again, value-added services.

The Challenge for Local Providers. The concept of integrated logistics has given companies the opportunity to reduce the cost of logistics. For logistics companies, providing integrated logistics has resulted in additional revenue streams as well as savings created from synergies in the supply chain. For many medium-sized logistics companies, the challenge now is on improving existing services (standard forwarding, transport and customs clearance services) and at the same time establishing additional capabilities for providing an integrated logistics or supply chain service for companies engaged in international and domestic trade.

The author is an international trade and customs consultant, and a licensed customs broker. He is a regular lecturer on logistics, indirect tax, customs and supply chain. Please contact aouvero@dlugms.com for your comments.